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The dynamics of investment and labour demand: Theoretical issues and an application to the Dutch manufacturing industry

  • Palm, Franz C.
  • Peeters, Marga
  • Pfann, Gerard A.

Lucas' (1967) adjustment costs model and Kydland and Prescott's (1982) time-to-build model induce mutually exclusive time-series properties that can be recovered from data. This paper investigates three variants of a theoretical model which give insight into the parameter restrictions implied by each of the two sources of dynamics separately. The variants, which simultaneously determine the interrelated demand for capital structures, equipment and labour, are analyzed using quarterly Dutch manufacturing data for the period 1971-1990. In a model with gestation lags, the additional dynamics induced by adjustment costs are not significant. This is not surprising since the economic interpretation of adjustment costs in addition to time-to-build is not obvious. Non-nested hyotheses tests, however, show that the two specifications imply mutually exclusieve time series properties which are statistically significant.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33042.

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Date of creation: Sep 1993
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Handle: RePEc:pra:mprapa:33042
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  1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  2. Altug, Sumru, 1989. "Time-to-Build and Aggregate Fluctuations: Some New Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 889-920, November.
  3. Nickell, Stephen, 1975. "A closer look at replacement investment," Journal of Economic Theory, Elsevier, vol. 10(1), pages 54-88, February.
  4. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  5. GINSBURGH, Victor A., . "A further note on the derivation of quarterly figures consistent with annual data," CORE Discussion Papers RP -161, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Pesaran, M H & Deaton, Angus S, 1978. "Testing Non-Nested Nonlinear Regression Models," Econometrica, Econometric Society, vol. 46(3), pages 677-94, May.
  7. Palm, Franz C & Peeters, H M M & Pfann, G A, 1993. "Adjustment Costs and Time-to-Build in Factor Demand in the U.S. Manufacturing Industry," Empirical Economics, Springer, vol. 18(4), pages 639-71.
  8. Treadway, Arthur B, 1969. "On Rational Entrepreneurial Behaviour and the Demand for Investment," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 227-39, April.
  9. Jarque, Carlos M. & Bera, Anil K., 1980. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals," Economics Letters, Elsevier, vol. 6(3), pages 255-259.
  10. van Alphen, Hendrik J & Merkies, Arnold H Q M, 1976. "Distributed Lags in Construction: An Empirical Study," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(2), pages 411-30, June.
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